Popular Inc (BPOP) 2003 Q3 法說會逐字稿

Good morning. Welcome to the E-LOAN Third Quarter 2003 Earnings Conference Call. All participants will be able to listen only until the question and answer portion of the call. This conference is being record. I would like to introduce your first speaker for today's call Mr. Chris Larsen, Chairman and CEO. Sir, you may begin.

Thank you, for joining us for E-LOAN's Third Quarter 2003 Earnings Call. With me today are Joe Kennedy, our President and Chief Operating Officer and Matt Roberts, our Chief Financial Officer. Let me begin by giving you an overview of our current condition followed by Matt who will review our financial results and forward guidance followed by Joe will who will provide further collar on each of our business units. E-LOAN record another outstanding performance in the third quarter, achieving earns of 12 cents per share on revenues of $33.8 million which was up 54% from the same period last year and down 5 percent from the refinanced heavy second quarter. Our third quarter earns exceeded our guidance by 2 cents per share and represented our eighth consecutive profitable quarter.

Most important to the long-term success of the company, we continued our outstanding growth in diversified revenue, which increased 14% in the quarter and 106% year over year, both numbers easily exceeding our guidance. As we have been predicting for well over a year, the end of the refinance boom has ushered in a transition period for the mortgage industry and for the company. We began this transition in the third quarter which saw refinance volumes dramatically lower, down about 32% an continues in the current quarter with a swift downdraft in the refinance mortgage industry towards long-term normal levels.

The good news is our business model is work very well in capturing demand across the consumer lending spectrum while refinance volumes are down dramatically, home equity recorded yet another spectacular quarter with volumes growing 31% sequentially. As we have said and prepared for over the last several years, in the current environment, home equity loans are the product of choice for consume, to extract rale estate wealth. The components of our diversified business model are up strongly with volumes up 24% sequentially and auto volume up 22% sequentially.

Nonetheless, the change from a refinance environment has been particularly abrupt for the industry with a sharp drop off in refinance volume, occurring well ahead of the comparable decrease in mortgage industry capacity. The result is causing intense price competition in both the purchase and refinance markets.

We think this transition will span the next two quarters as mortgage exporters fight for a share through industry wide overcapacity which will pressure our next two quarters on the mortgage side of our business. A response to this transition is to shift resources to cannot our aggressive growth in diversified product revenue, especially home equity lending, to aggressively compete for the excellent credit customer, really the sweet spot of internet lending and to increase our purchase and refinance market share. Looking across our businesses, E-LOAN's common value proposition is an extremely competitive price point delivered through a fast straight forward no hassle experience. We believe the current environment is perfectly suited to the strengths of internet lending in general and to E-LOAN's business model in particular.

In the current competitive environment, price, customer experience and trust delivered through the transparency of the internet are key drivers to attract excellent credit customer. As one of the best known and trust brands in internet lending we have the best opportunity to attract these customers who require less processing steps and confidents. That makes our process simpler while allowing us to monetite the investment class loans to the capital markets providing a virtuous cycle of lower cost driving more excellent credit customers ant so on. Thus while Q4 and Q1 results will reflect a transition characterized by sharply lower refinance business, we're very bullish on our about the to grow our business overall.

In our guidance for this quarter, already 75% of our revenue is diversified. For 2004, we are guiding for total revenue that is over 85% diversified. Clearly, E-LOAN can no longer be considered as a refinance or even mortgage dominated company. With E-LOAN's earnings growth over the next seven years, driven overwhelmingly why its fast growing diversified production, the company should be much more heavily valued based on high quality diversified earnings than on traditional company metrics.

In short, we are in the midst of a transition that we have been predicting for a long time. The transition is steep and fast E-LOAN is very well positioned to aggressively compete and grow as broadly diversified consumer lender. Growth based on the continuation of the strong diversification trends we have already established over the last two years. With that, let me now turn the call over to Matt who will discuss our Q3 financials in details guidance.

Thanks, Chris. Before I begin the financial review, I would like to remind that you during call, we may make forward-looking statements based on current expectations that involve risks and uncertainties. E-LOAN's actual results may differ materially from the results described in the forward-looking statements. Factors that could cause actual results to differ include but are not limited to general conditions in the lending industry, interest rate fluctuations and the impact of competitive products. These and other risk factors are detailed in the E-LOAN's filings were the Securities and Exchange Commission. I would lake to review a summary of our financial results for Q3 2003 our earnings press lease includes a detailed presentation for your review. Slide four of our presentation shows the highlights of the third quarter of 2003.

Revenues totaled $423.8 million and increase of 54% compared to the $28.4 million in the same period last year. Of the total revenue, 45% was prime refinance mortgage, 29% was purchase and nonprime mortgage, 20% was home equity and 6 percent was auto related. Diversified product growth revenue in total was 55% of our revenue compared to 46% in the prior quarter and 42% for the third quarter of 2002. Net income was $8 million or 12 cents per share on $67.1 million diluted shares compared to net income of $3.1 million or 5 cents per share on 59.6 diluted shares for the same period last year direct margin which is define as revenue minus variable and fixed operation expense total compared to the $13.2 million in the same period last year. As for our balance sheet, total assets tend of the quarter were $163 million which includes cash and cash equivalents of $49 million of which $2.5 million is restricted and for $67.5 million. Hotel for sale decreased as our sold loans exceeded closed looms in our quarter. Total liabilities were $83 million and included $61 million in borrowings related to mortgage, home equity and auto loans held for sale.

Decrease in bore rogues on loans held for sale decreased. Total stock holders at the end of the quarter was $80 million. Now I would like to update you on financial guidance for the remainder of this year and provide our initial guidance for 2004.

Again, our earnings press release included detailed presentation for your review. Slide 5 outlines the assumptions that support our financial guidance. First I'm going to review this assumptions that support our Q4 guidance. According to the most recent mortgage bankers association forecast, October of 2003, refinance volumes is expected to decline 65% from Q3 record levels an purchase volume is expected to decline 23% reflecting normal fourth quarter seasonality. We expect that our refinance and purchase mortgage volume will outperform the general mortgage market in Q4. We anticipate a decline of 23% in our prime refinance volumes in Q4 versus a forecasted market decline of 65%. We expect purchase mortgage volumes to be similar to the volume in Q3 versus a forecasted market decline of 23%.

As we have mentioned in our prior guidance, we expect our revenue from mortgage loan and interest rate to continue to trend down from record high levels earlier in the year. This trend is a normal component of a declining refinance market as a significant imbalance between the industry capacity and demand results in increased competitive pricing pressure. We experienced the start of this decline in Q3 and further decline Q4. Home equity loan volume is expected to continue its strong growth as consumers opt for that loan type versus cash out refinance to meet their needs. We expect to continue an aggressive marketing spend plan to build on the demand in our diversified products. Given the above assumptions we expect to break even on revenues of $34 million, only 25% of which is expected to be from prime mortgage refinance. This quarter marks a significant transition for the company to a revenue based dominated by diversified products. 2003 total revenue is expected to be approximately $159 million representing a 54% improvement over 2002 revenue. We expect 2003 net income of approximately $22 million or 34 cents earnings per share on approximately $66.5 million diluted shares in 2003. Representing 110% percent improvement over 2002 net income.

Slide 6 turns to our outlook for 2004. Given the dramatic decline in the refinance market from historic level, we are anticipating a period of significant shift in our product mix. This transition was anticipated in our tragedy of building diversified revenue and as such we anticipate that 2004 will reflect the full impact of this transition as prime refinance revenues decline to 15% of total revenues down from 46% in 2003. Slide seven illustrates our diversified progress over time. The mortgage bankers association forecasts is for a decline in the refinance mortgage market of 80% in 2004. However, demonstrating the stability of the purchase mortgage market 2004 purchase mortgage origination are expected to be similar to 2003 record levels. We expect aggressive pricing competition in the mortgage market during this time. We anticipate that prime mortgage refinance volumes will decline 48% in 2004 representing a substantial market share gain from 0.12% in 2003 to 0.32% in 2004. Our purchase mortgage volumes are expected to be to increase 49% in 2004. Also representing a substantial market share gain from 0.14% to 2003 to 0.21% in 2004. Anticipated lower revenue per mortgage loan versus 2003 levels will also suppress total mortgage revenue in 2004. Home equity loans an lines of credit should continue to increase in appeal for consumers looking to access the equity in their home as the refinance market contracts.

In the auto finance market should improve as the economy improves. Given the above assumptions we expect 2004 total revenue to grow to approximately $260 million, similar results to 2003 on a substantially different revenue mix. Our diversified product revenues is expected to total approximately $137 million in 2004 representing earning improve improvement target for diversified revenue. Prime mortgage refinance revenue is expected to account for 15% of our total revenue in 2004 down from 46% in 2003. Then we continue to target diversified product revenue in excess of $190 million in 2005. We expect 2004 net income of approximately $16 million or 23 cents earns per share on approximately $68.5 million diluted shares in 2004. Now I would like to turn the call over to Joe for his operational review.

Thanks, Matt. I would like to focus remarks on where we are in today's post refinance boom conditions. In each of the primary businesses. Mortgage, home equity and auto and from a marketing standpoint. Please forward to slide 8. As we have consistently predicted, the ending of the refinance boom has been accompanied by a dramatic increase in home equity lending. We have been preparing for this day for a long time. And that preparation is paying off with very strong growth and excellent margins in our home equity business. Home equity loan volume in Q3 was up 31% versus Q2 and we expect it will increase another 20% in Q4 December spite adverse seasonal effects in the latter part of the quarter.

Direct margin rose to 50% in Q3 and we believe we can sustain at least this level of margin going forward. Unlike the mortgage business, we have not seen any change in the level of home equity price competition. In many ways, the structure of the home equity industry is the most attractive to us of all of our businesses. Unlike the broker dominated mortgage business there are far fewer competitors. Mostly large retail banks. Pricing is much simpler for the consume tore understand and being prime rate based doesn't change every day.

This enables consumers to really understand who the most competitive providers are. As a result the home equity business is really all about confident and process. Especially for the excellent credit customers that are our primary focus and are highly efficient delivery model and streamline process enable us to offer extremely competitive rates and a quick and easy experience these customers rave about. We will continue to grow this business aggressively while also working intensely to secure the best cost position in the industry.

Just to give you a sense of how aggressively we are looking at opportunities to improve the cost and process in this business, we are in the final planning stages of setting up a small pilot operation with a partner in India that would complement our U.S. home equity operation by performing certain back office functions overnight, taking advantage of the time difference, the India pilot will not only be a low cost operation but also one that helps shorten our cycle times. Further improving the customer experience. Please forward to slide 9. Our total home equity volume for the year 2003 will be up over 70% versus 2002. Looking forward to 2004 we expect to increase our home equity volume by 81% versus 2003.

In the mortgage business, while our volumes are down, we have long believed that these are the conditions in which we gain share. The price war that accompanies the end of boom conditions really means that the mortgage business is now a cost war and we will use our highly efficient platform to compete intensely. Reflecting our low cost focus, we have quickly adjusted our capacity some light of the reduction in finance business. We have already reduced head count by 10%, virtually eliminated overtime and made a number of cost saving changes. Some of the employees no longer needed in mortgage have been shifted to home equity, reflecting the flexibility in current in our model and helping us to respond quickly to the rapid growth in home equity demand.

Everyone in our organization understands that low cost are fundamental to our business. Regardless of conditions, we will focus intensely on securing an industry leading cost position. At the same time our long standing focus on the purchase business is paying off as purchase demand remains reasonably strong across the industry. Please forward to slide 10. We expect to continue to grow our share of the purchase market because of the usual seasonal downturn in the industry, as Matt mentioned the NBA is forecasting that overall industry volume will be down 23% in Q4 versus Q3 and another 14% in the first quarter of next year. During this period, we expected our volume to be close to Q3 level, outperforming the industry. And then to enjoy significant absolute volume growth as the purchase season picks up again in Q2 of next year. Our total purchase volume for the year 2003 will be double that of 2002.

Looking forward to 2004 we expect to increase our purchase volume by approximately 50% versus 2003. Please forward to slide 11. In the auto business our volume was up 22% in Q3 versus Q2 providing early evidence that the changes we are been making to build a great foundation in the auto business are the right once and we continue to build a good foundation here in the current quarter as costs are also coming down our conversion is improving and new products such as motorcycle and person to person loans are being launched. As we move into 2004, we will increasingly focus on developing and testing marketing and business development approaches with the goal of significantly increases auto demand. From a marketing standpoint our focus now across the board is on continuing to aggressively grow our diversified product businesses while also aggressively improving our marketing efficiency. In marketing, and across our entire business, we have been preparing for these post refinance boom conditions for a long time. These conditions call for both highly efficient marketing and very low cost operation and these are the conditions in which we believe we can compete best. We now like to open the call up to any questions that you all may have.

[operator instructions]

Our first question comes from Rich Repetto. You may ask your question.

Hello, guys. A few different. First, Joe, on what you just finished up in your presentation. On the auto side, it looks like you took down guidance a little bit in Q4 even though pretty much on projections what you forecasted last conference call, yes, conference call for this quarter. So just trying to see what are you seeing, it went from $3.5 million down to $2.8 million. What's dynamic there with the auto?

Next question comes from Mitch Tukman (ph). May we have your question?

Yes, I'm curious if your, are you sticking to the guidance you've given on prior calls of diversified products growing 50% per year through 2005?

And Mitch, have I to represent. This is Chris. I think we had lost Rich. So we're going to come back to Rich.

Yes, I didn't hear anything, I thought maybe it was because I press the button.

I we apologize for that. We're going to come back to Rich here if we can get him back on.

One moment. Rich, your line is now open.

Is he there?

Just a moment. Your line is open, sir.

Yes, can you guys hear me?

I'm sorry, Rich. I got your question, relative to the auto business, several factors that made us bring down the auto picture a little bit in Q4, some sensitivity to the level of seasonality that we're looking at as we move into the November and December holiday period in the auto business. More significantly, we've also made the decision to completely exit the business of underwriting processing and funding sub prime loans in the auto business.

So our internal operation is now entirely focused on prime and super prime lending and that transition may cost us a bit. But it's the right move for us in the long-term in terms of customer base that we really can focus on and excel at. We're also probably a little bit more cautious on the revenue per loan side there. Although not much. So it's not a fundamental change in our outlook in the auto business but a few different factories drive down the auto outlook just a bit.

OK. By exiting the sub prime auto, is there any, I know you didn't carry those loans, but is there any after effects or impacts of prior originations from that into that sector?

Not at all. And we will continue to do some business with that through partners, but we will not do the underwriting processing funding ourselves but refer sub prime customers that don't meet our criteria to various part next, including the ones we've been work with for some time, but we peel is the right operational focus for us and where we can really excel.

OK. I guess I don't know whether we can add to anything, but I know what you've said on the call about home equity. But you know, it looks like fiscal year '04 revenue, you know, all things, you know, just take a look at the bigger picture, but it's a bet on home equity, because you have that volume more than doubling or revenue more than doubling. And I guess is there any, I guess we've covered that, you know, the strategy to you know to meet those numbers. Am I missing anything there?

Rich, I just emphasized that our forecast for home equity in 2004 is simply a clear continuation of the trend that we've established over the past two years, you know, the growth rate next year is quite similar to the growth rate for this year and the home equity conditions are substantially better next year than they are this year without refinance as a significant alternative for consumers looking to extract equity from their homes.

OK. And Matt, is there any difference between the margin or the revenue per loan reified versus purchase right now?

No substantive change, no substantive difference, no.

OK. And I guess what we've seen is the margins just immediately, well, I guess this is all built into the numbers you already put out in the guidance. I guess last question, Matt, on the share count, you know, we've seen shares going up, the diluted share count, now we see them going down in the fourth quarter. Now is that gist a pure function of the stock price and delusion of options or is it anything to do with potential buy-backs or anything like that?

No it's simply the stock price impact on the amount of options that get included in the diluted CALC.

OK. That's all I have thanks.

Thanks, Rich.

Sir your line is open.

Hello

Hello, Mitch.

Hello.

We apologize.

Do you want me to ask the question again? I've actually got another one now. But I can,

OK. Yes

The main question is the guidance you've been giving about diversified products growing 50% a year, which is I think you started giving that guidance about a year ago, as a group that they would grow 50% a year through '05. By my quick numbers here, your diversified products about $136 million next year in '04. Are you still expecting those to grow 50% a year through '05?

Yes. I mean we said as much as well in the call relative to that we expect that, diversified revenue would be in excess of $190 million.

Right. OK. So they're going to be in excess of $190 million in '05, that's still, you guys are sticking to that?

That's correct.

And am I also right in extrapolating out from the guidance that refi in '04 is going to be about $24 million including interest and mortgage fees?

That's correct.

That's a pretty, I mean that's, isn't that lower than all the refi business you guys did in '01? Is that overly conservative, I guess, is my question.

Well, you know, Mitch, I think the way you look at the company right now, there's really two components of what E-LOAN does. There's a fast growing, I think we've proven a very nice trend line through you know, a number of different kinds of markets. Fast growing diversification part of the company, which we continue to see growing out next several years. And then there's been a very unpredictable refinance component.

I think, you know, quite frankly investors having been concerned about the refinance component while it was a big number, because it had all the same kind of uncertainty, that going into next year, I think what we're seeing, and this is backed up by NBA forecast as well, it's something like down to 15%, of out of business, almost I think you could safely say that the variability, that you can assign to that market is practically immaterial, because it's just not a big part of our business. We are broadly now, a diversified consumer lending company going into '04, and that's the guidance we're putting out there.

Matt, on the cost side, if you look at the '03 guidance and '04 guidance, net income goes from $22 million down to $16, but revenue's flat. Where is the other $6.4 million going?

Yes, it's really predominantly compression on revenue per loan, versus historic levels in 2003. That's a pretty dramatic impact. So that's the short answer.

So where do you expect your gross profit margin's going? I mean your, as I'm kind of doodling through this in real time, '03, it looks like your operation costs are about 47, 45.7% somewhere in there. Are they going up to as high as 50% next year?

Yes, I mean 2004 are direct margin would be 52% in the guidance, or 48% of the operating expense. The long-term model, we remain committed to for the business, which is that the direct margin that we would attain on revenue would be 55%. The cost of sales and marketing, there's roughly 25%. Technology about 8% and G&A about 5 or 6% and a pretax of 20%.

OK, Good. I think I can figure this out. I appreciate your time, guys. Thank you.

Thank you, Mitch.

Thank you. The next question comes from Ted Janus (ph), your line is open.

I missed a few minutes of the call, so please excuse me if you addressed this, but I would like you to go into a little bit of detail of what you're doing with marketing right now?

Ted, this is Joe. We continue to be aggressive from a marketing standpoint, very focused on continuing to aggressively grow the diversified products, particularly home equity which is you know a very, very strong market right now. As well as continuing to grow the purchase business. And everything in the guidance we've given both for the current quarter and for next year is based on a continued aggressive marketing posture relative to the diversified products.

And is the percentage revenues that's going up?

The marketing percent of revenue is going up. That's not a function of the marketing becoming less efficient per se. That's really a reflection of the revenue compression per loan. The market is continuing to generate loan volume, but the revenue value of the loan volume is going down on the mortgage side because of the compression that we've talked about as capacity and demand are highly mismatched in the mortgage industry right now. So the marketing continues to work well for us. At the same time, we continue to focus on improving the fish signify our marketing and as Matt said are committed to work ourselves to a long-term target of 25%.

What about marketing for auto loans?

The marketing for auto loans is primarily online based. We've had a greater focus over the past year on rebuilding the operational foundation and business structure in auto and were pleased with that work. We continue to see the margins improving there, the conversion improving and are beginning to shift our posture more to the standpoint of hey, the operation now ready for prime time and let's start getting more aggressive in firms of developing the marketing side to build demand.

OK. And let's go on with the television ads right now?

We continue to be aggressive out there, continues to be our core component of our marketing approach and we like what it's doing for us in terms of home equity and purchase demand in particular.

Great. And then Nick Kelly (ph) here has a couple of questions.

Hi. Loans held for sale really dropped off this quarter, what was the cause of that? And can we expect it to stay at these levels going forward?

Yes, the decline in the loans held for sale is we sold more loans than quoted normal component of this pint in the market where volumes are declining based on the refinance. And I would expect that you should loans for sale roughly at these levels.

What tax rate are you assuming for 2004?

We're using a consistent tax rate as we kind of move through technically California should go away from their moratorium on the use of NOL's in 2004 but we're not exactly banking on that given the budget situation in California. So we're keeping it consistent to 2003 which is about 11.5%.

One final question here, so did you say you have already started processing some loans through the India back office?

No we are in the final planning stages and anticipate bringing that up over the course of the next several months

OK. That's. Thank you.

Thank you.

Thank you. I would like to turn the call back over to Mr. Larsen.

Just want to thank everybody for joining us today, we look forward to seeing you at our next investor presentation. Thank you.